Lenders Still Selling Shaky Loans

SAN FRANCISCO-More than three years after the mortgage crisis began, some lenders are still selling loans to Fannie Mae and Freddie Mac without properly verifying borrowers' ability to pay.

While most mortgage sellers today are providing documentation of borrowers' incomes, executives from the government-sponsored enterprises said there are cases where the information in the loan file does not match the debt-to-income calculation the lender made in qualifying the applicant.

"It's spotty, depending on the lender," said Jim Cotton, Freddie's vice president of sales.

Speaking at a California Mortgage Bankers Association secondary marketing conference here last week, Cotton said he is seeing problems with "documentation in the file and whether it supports the income," though there has been some improvement with loans sold to Freddie this year.

Marianne Sullivan, a senior vice president at Fannie, told the lenders in attendance they can expect additional guidelines from the GSE that require some proof of a borrower's ability to pay their mortgage.

"There has been a renewed focus on borrower sustainability and making sure they can stay and pay going forward," Sullivan said.

Fannie and Freddie have increasingly been forcing sellers to buy back mortgages that the GSEs determined did not meet their guidelines. Lenders repurchased $3.1 billion of defective loans from the two GSEs combined in the first quarter, 64% more than a year earlier, according to Securities and Exchange Commission filings.

In March Sullivan announced a "loan quality initiative" to help lenders follow guidelines so they can avoid having to buy back loans from Fannie. At the conference, she also emphasized that credit changes made during the downturn are not going away. Borrowers now will have to make a minimum 5% down, have decent credit and show an ability to pay even during tough economic times, she said.